Whether the Amount Paid for the Share Purchase Right shall be Taxable upon the Sale Thereof

October 17, 1994 BIR RULING NO. 153-94 24 000-00 153-94 Makalintal Barot Torres & Ibarra 2/F Benpres Bldg., Exchange Road corner Meralco Avenue, Ortigas Center 1600 Pasig, Metro Manila Attention: Mr . Wilfrido E . Sanchez Gentlemen : This refers to your letter dated September 15, 1994 stating that Lopez, Inc. is a corporation duly organized and existing under Philippine laws and owns certain shares of stock in Benpres Holdings Corporation, a Philippine corporation whose shares are registered under the Revised Securities Act and listed with the Philippine Stock Exchange; that Lopez, Inc. intends to enter into a Share Purchase Agreement whereby Lopez, Inc. will grant share purchase rights to prospective holders who will be given a right but not an obligation to purchase Benpres Holdings Corporation shares at an exercise price fixed on the date such rights are granted; that the share purchase right will have a price or consideration separate from the exercise price; that in addition, a deposit by the holder will have to be made; that such deposit shall be applied by Lopez, Inc. to the exercise price should the holder decide to exercise his right to purchase the share; that Lopez, Inc. will recognize such deposit as a liability; that upon exercise of the right, the holder must pay an exercise price; that as an example, assume that one share purchase right will be sold at P0.50 and agreed exercise price of a share of Benpres Holdings Corporation is fixed at P12.25 per share; that in addition, the holder will have to deposit with Lopez, Inc. the amount of P12.00 as a deposit to be applied by Lopez, Inc. to the agreed exercise price of a Benpres Holdings Corporation share, should the holder exercise his right to purchase the share; that upon exercise, the holder pays the exercise price of P12.25 to Lopez, Inc. and Lopez, Inc. sells the Benpres Holdings Corporation share to the holder; that Lopez, Inc. applies the deposit to the exercise price of the share, and the holder pays in cash the balance of P0.25 per share; that the sale by Lopez, Inc. to the holder shall be made through the stock exchange and shall be crossed and recorded as having been sold at the prevailing market price; that if the holder is not qualified to hold or own Benpres Holdings Corporation shares, Lopez, Inc. will cause the sale of the shares at the prevailing market price through the stock exchange and the delivery of the proceeds of the sale to the holder. cdta In connection therewith, your request confirmation of your opinion on the following: "1. The amount paid to Lopez, Inc. for the share purchase right (of P0.50 in the example) shall be taxable to Lopez, Inc. upon the sale of the share purchase right; "2. The deposit (of P12.00), shall not be subject to tax upon receipt thereof by Lopez, Inc.; "3. Should the holder exercise his stock purchase right to purchase Benpres Holdings Corporation shares, Lopez, Inc. shall be taxable on the exercise price of P12.25, inclusive of the deposit of P12.00 applied to the exercise at the time of the exercise of the share purchase right." In reply thereto, please be informed that income tax accrues only when taxable income has been realized. Economic gain realized or realizable by the taxpayer is necessary to produce a taxable income. (Helvering vs. Horst, 311 U.S. 112) Accordingly, your opinion that the amount paid to Lopez, Inc. for the share purchases right (of P0.50 in the example) shall be taxable to Lopez, Inc. upon the sale of the share purchase right; that the deposit (of P12.00), shall not be subject to tax upon receipt thereof by Lopez, Inc.; and that should the holder exercise his stock purchase right to purchase Benpres Holdings Corporation shares, Lopez, Inc. shall be taxable on the exercise price of P12.25, inclusive of the deposit of P12.00 applied to the exercise at the time of the exercise of the share purchase right are hereby confirmed. cdt Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue